Territorial Activities and Tax Progressive Rates

Petroarsa SA filed a complaint before a court in the Province of Tucuman, challenging the constitutionality of Law 8834 article 1, which increased the Gross Income Tax rate based on the taxpayer's taxable, non-taxable, and exempt income realized from activities carried out within or outside Tucuman. The dispute centered on whether the provincial government, when deciding to apply a higher rate as income increases, must consider only the gross income attributable to the Province or has the authority to tax the total gross income from activities carried out nationwide.

The company's main argument was based on Law 23548 article 9, which establishes that the tax on gross income can only be applied to activities the taxpayer carries out within the provincial territory. Therefore, if the rate increases based on gross income realized nationwide, it is no longer limited to income from activities carried out within the province, thereby violating the requirement of territorial basis for the tax.

The Supreme Court of Justice of Tucuman overturned the lower court's ruling, which had declared the challenged local regulation unconstitutional. The Court reasoned that all of the taxpayer's gross income from any activity, whether conducted in or outside the Province, is an expression of the taxpaying capacity, which serves to progressively set the final rate payable under the Gross Income Tax. Thus, considering all income to progressively determine the final rate payable—with the taxable event and base respecting the territorial basis—aligns with the established doctrine affirming that provinces may choose an appropriate method to determine taxes. Such method will be valid and lawful as long as it does not specifically tax extraterritorial activities.

Dissatisfied with the decision, Petroarsa filed an Extraordinary Appeal, which the Supreme Court of Justice of Tucuman rejected. Consequently, the case was presented to the Argentine Supreme Court a Direct Appeal.

In its ruling, the Supreme Court, by majority vote, held that the grievances raised by Petroarsa presented sufficient federal questions to enable the intended proceeding, given that the Supreme Court of Justice of Tucumán had failed to address decisive issues, resulting in an irremediable infringement on the right to defense in Court.

The issue the Supreme Court referred to as omitted is whether, like the taxable event, the taxable base and the rate must also meet the requirement of territorial basis. In other words, whether the connection in question requires that, in setting progressive rates, consideration must also be given to the territorial basis of the income used for that purpose. This argument had been decisive in resolving two substantially analogous cases subsequently decided by the Supreme Court of Justice of Tucuman[1], in which the taxpayer's claim had been upheld. In its ruling, the Supreme Court references and emphasizes the central points of those decisions.

In light of this, the Supreme Court found that the solution in the judgment of the Tucuman  Supreme Court was based on merely dogmatic assertions, providing only apparent grounds and thus disqualifying it as a judicial act. This led to its disqualification in accordance with the Supreme Court's doctrine on the arbitrariness of judgments. The Supreme Court remanded the case to the lower court.

In his vote, Justice Lorenzetti referred to the arguments of the Attorney General for Tax Matters. In his opinion, the Attorney General argued that income realized from activities conducted outside the province should not be considered for setting the tax rate. This is because such income represents wealth beyond the limits of the province’s taxing authority.

Finally, in his dissenting opinion, Justice Rossatti argued that the Extraordinary Appeal filed fell within the purview of provincial judges and outside the federal jurisdiction of the Supreme Court. He further stated that the taxpayer failed to demonstrate the alleged arbitrariness and that the subsequent rulings reflect the Tucuman Supreme Court’s direct change in criteria.

Why is this ruling reasonable?

The Supreme Court of Justice disqualified the judgment of the Tucuman Supreme Court, deeming it arbitrary for failing to address the argument regarding the territorial activities, in line with subsequent rulings from the Provincial Court itself. Nevertheless, despite some rulings in which the Supreme Court of Justice has emphasized the importance of distinguishing between the taxable event and the quantification of the tax, the possibility of revisiting this discussion remains open. This discussion has significant implications for many disputes concerning local taxes (not only the Gross Income Tax but also municipal taxes). The potential for revisiting this discussion is particularly evident when considering the opposing positions between the Attorney General for Tax Matters and the dissenting opinions of Justices Lorenzetti and Rossatti.

Therefore, the importance of the territorial basis concerning other elements of the tax regains significance and opens the door to articulating very important arguments, the weight of which must be carefully considered within the context of local litigations.